I am a New York lawyer, focusing on tax law and estate planning. I will be writing mainly about estate tax developments and estate planning issues; but I will also write about elder law, retirement planning, and practice management.

Family Loans Still Attractive After IRS Releases April AFR Interest Rate

The IRS published the applicable federal rates for April 2011 in Rev. Rul. 2011-10. The rates are still low:

Section 7520 Interest Rate: 3.0%

120% of the Applicable Federal Midterm Rate: 2.98%

The Section 7520 Interest Rate did not change for April. The 120% Applicable Federal Midterm Rate is slightly higher. It was 2.94% for March and is 2.98% for April.

Talk to your trusted estate planning advisor about the following estate planning strategies, which are attractive in a low-interest rate environment:

loans to family members

installment sales to grantor trusts

grantor retained annuity trusts (GRATs)

charitable lead annuity trusts (CLATs)

It is important to note that a low federal interest rate is not the only factor that makes these strategies “work.”

When the 7520 rate rose from a rate of 2.8% for February 2011 to 3.0% for March 2011, Jonathan Blattmachr (former partner at Milbank Tweed Hadley & McCloy and founder of InterActive Legal) explained in an email,

[T]he difference between a 2% and a 3% rate is not likely to significantly affect how well the strategy “works.” Rather, it is the growth or decline of the underlying property that matters. The key distinction is that the section 7520 is . . . fixed for the “life” of the strategy but investment opportunities can be changed instantly.

Blattmachr’s point about the ability to restructure planning that has already been implemented is important. For more on this point and for a sophisticated explanation of how interest rates affect the calculations in commonly used estate planning strategies, see this article by Diana S.C. Zeydel (shareholder at Greenberg Traurig).

Notes

The section 7520 rate is used for GRATs and CLATs, among other strategies.

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